Pre 86, Post 87 non-deductible contributions
Client age 75 has $195,000 in a 401k plan. Statement lists $8500 of pre-1986 non-deductible contributions and $2,800 of Post 1987 no deductible contributions. Goal is to pay least amount of taxes. How do I accomplish this?
Permalink Submitted by Alan Spross on Wed, 2012-01-18 20:27
Is this plan subject to RMDs or is he still working there?
Is he interested in rolling after tax dollars to a Roth IRA or just keeping the funds in a taxable account?
Permalink Submitted by Richard Horner on Thu, 2012-01-19 14:51
Subject to RMD’s, Roth would be ideal
Permalink Submitted by Alan Spross on Thu, 2012-01-19 17:09
With the numbers as they are, since RMDs must be taken first, he should request that the 2012 RMD be supplied first from the pre 87 after tax contributions. That amount is very close to the RMD, and any additional amount needed to satisfy the RMD would be pro rated with pre tax dollars in the plan. The 2012 RMD would therefore be almost tax free, and does not leave enough post tax left to bother with the Roth IRA.
After the RMD is satisfied, he could request a direct rollover of the balance to a traditional IRA, or just the pre tax amount and ask for a check for the roughly 2,800 of after tax amount remaining. If he wants to include the 2,800 in the direct rollover, then he will need to file an 8606 for the rest of his life for a very small % of basis in his TIRA.
If he does not have a TIRA presently, he could just keep the balance in the 401k plan, and make sure the beneficiary he has named is correct. If a non spouse beneficiary inherits the plan, the non spouse has an opportunity to convert to an inherited Roth IRA, whereas they would not with an inherited TIRA. If he keeps the 401k he will also not have to worry about the amount of each RMD that is post tax because the plan will break out that amount on each 1099R.